Asia’s financial interconnectedness: Evolution, implications, and insights from past crises

Peter Rosenkranz and Monica Melchor

Economic Analysis and Policy, 2022, vol. 76, issue C, 685-707

Abstract: Past crisis episodes have illustrated the interplay of macroeconomic and financial conditions, including the presence of harmful macrofinancial feedback effects. Meanwhile, financial markets have become increasingly connected and economic and financial cycles more synchronized over time. Against the backdrop of past financial crises and the ongoing COVID-19 pandemic, we document and analyze trends in Asia’s financial interconnectedness over the past 3 decades, as well as its possible role in predicting financial crises. Employing a vector-autoregressive model and a panel probit regression, we find that financial interconnectedness increased across Asia and the Pacific, being particularly pronounced during past crises, including the present COVID-19 pandemic. We also find that increased interconnectedness is strongly and positively associated with the probability of crisis onset.

Keywords: Financial interconnectedness; Financial crises; Asian financial markets; Vector autoregression model; Dynamic panel model (search for similar items in EconPapers)
JEL-codes: C32 C33 F36 G01 G15 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:76:y:2022:i:c:p:685-707

DOI: 10.1016/j.eap.2022.08.024

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